Backlash grows over China's development funding

On September 3, 49 African heads of state descended on Beijing, China’s capital, for the triennial Forum on China Africa Cooperation (Focac). Presided over by Chinese president Xi Jinping, the forum mapped out the next phase of Chinese financial support for Africa’s development.

Mr Xi announced pledges totalling $60bn for the region, the same amount promised at the last Focac summit in Johannesburg, South Africa, in 2015. The package includes new credit lines, concessional financing and a $5bn import finance fund for products from Africa. “China believes that the sure way to boost China-Africa co-operation is for both sides to leverage its respective strength,” Mr Xi told the forum. “In doing so, China follows the principle of giving more and taking less, giving before taking, and giving without asking for return.”

Some are now questioning whether the latter is true. Across Asia, partners such as Sri Lanka, Pakistan and Malaysia are turning sour on joint projects with China. The IMF has warned of debt burdens accumulating in developing countries as a product of China-led Belt and Road Initiative projects.

Global power rising

African leaders have also voiced concerns. Mr Xi’s announcement of an import finance fund targeting the region is a new development in response to criticism of China’s ballooning trade deficit with African markets. Critics have accused China of predatory lending practices in order to extend its influence, using the state’s vast development financing capacity as its war chest in a global campaign.

Advocates, however, are adamant that China’s investment in other developing markets is simply a smart move. “Thirty years ago, most Chinese people in Europe, even scholars, were cleaning dishes. Today you go back to London you see there is a large [Chinese] middle class going to Louis Vuitton, to Chanel, buying a huge amount of luxury goods,” says Helen Hai, CEO of the Made in Africa Initiative. “This is the power of a rising middle class. [China] is not just helping its own country, it’s good energy for economic transformation globally.”

As China emerges as a global power, its rise has been greeted with a mixture of fascination and consternation. The US, in particular, is discomfited. For all of China’s talk of ‘win-win’ co-operation, the American bet that two decades of liberalisation would produce a more democratic China has not materialised. At the same time, the US's stature on the global stage has declined.

The intensity of that rivalry heated up in 2018. “Great power competition – not terrorism – is now the primary focus of US national security,” US defense secretary Jim Mattis said in January. Some believe China’s moves are the result of miscalculation. “China’s mistake is that it failed to understand that the US was not following the same path of gentle decline as Europe,” says Peter Fuhrman, CEO of China First Capital.

As stories of China’s supposedly predatory lending practices emerge, the US is seeing development finance as a key competitive arena. Much of the motivation for creating a new $60bn US development bank – currently awaiting a Senate vote – is motivated by a desire to counter China’s growing global influence.

Sri Lanka fallout

In the past year, several countries across Asia have expressed displeasure at the terms of projects they have undertaken with China. First there was the Chinese-built port in Sri Lanka that China assumed control of in late 2017. Unable to repay loans on the $1.3bn cost of the Hambantota port, which opened seven years ago and has seen sparse traffic, the Sri Lankan government handed the control of the port back to state-owned China Merchants Port Holdings.

Critics claimed the move was an erosion of Sri Lankan sovereignty. Some claim further that China deliberately imposed untenable terms on the project.

“Beijing typically finds a local partner, makes that local partner accept investment plans that are detrimental to their country in the long term, and then uses the debts to either acquire the project altogether or to acquire political leverage in that country,” Constantino Xavier, a fellow at think tank Carnegie, told the Financial Times at the time of Sri Lanka’s port handover.

Others disagree, blaming incompetence at the Sri Lankan state-owned operator. “The Chinese, in that instance, did not structure it so it would fail…[They] said: ‘Here’s the money, we’ll build it and even a moron running this thing will generate the free cash flow to pay us back.’ But [the Sri Lankans] couldn’t or wouldn’t run it. It became this crazy satrapy of government mismanagement and corruption,” says Mr Fuhrman.

Anger in Asia

Sri Lanka is not alone. In the past few months, Malaysia has cancelled three pipeline projects and a rail project linked to the Belt and Road Initiative. Meanwhile, in the Philippines, firebrand populist president Rodrigo Duterte has lashed out at China. Polls show Mr Duterte’s popularity slipping while concerns about China’s inroads into the country, which the president had encouraged, are growing.

In perhaps the biggest blow to China, Pakistan’s new government intends to review or renegotiate the terms of the China-Pakistan Economic Corridor project. With a $62bn price tag, it is one of the most ambitious projects of the Belt and Road Initiative.

Coupled with China’s escalating trade war with the US, the Far Eastern giant is in an uncomfortable position. “China looks at its near abroad and doesn’t see a lot of friendly faces,” says Mr Fuhrman. “So where China is with Focac and Belt and Road is: how do I cope, as a rising, aspiring power that has no real allies?”

Lack of transparency is part of the problem. Disentangling China’s state-backed financing is complicated. Export credits, guarantees, co-ventures and project advances are mixed together with grants and policy loans from state-controlled banks.

Accurate data on China’s lending to other countries is also hard to come by. Best estimates, published by the SAIS-CARI institute at Baltimore-based Johns Hopkins University, put total China debt stock for Africa for 2016 at about 22%.

Transparency is also an issue when attempting to distinguish between pledged amounts and disbursed investments. In Zimbabwe, for instance, total pledges from China over the past two decades total some $33bn – but some sources claim only $2.5bn of that has been released so far. All of this breeds distrust.

South-south pitch

China’s pitch to other developing countries positions itself as a peer and an equal. The 'five nos’, for example, are the cornerstone for its policy of non-interference in African partners’ internal affair.

“I think when President Xi talks about ‘the five nos’, that’s very genuine. We don’t think we know better, we don’t try to tell them what policies they should follow but would like to share our own experience and lessons,” says Jiang Xiheng, vice-president of the state-backed China Center for International Knowledge on Development.

This pitch has appealed to poorer countries tired of being dictated to by the World Bank and OECD countries. China’s willingness to deal equally with oppressive or poorly run countries without reprimand makes Western counterparts uncomfortable. But advocates say the results speak for themselves.

“Before we talk about anything else, on the ground there are new roads, there is clean water – this is a very important transformation that China has helped make,” says Ms Hai. “There’s a huge infrastructure gap in these countries, and clearly international development agencies such as World Bank and the IMF haven’t found the perfect solution. They have been trying for 60 years.”